Resources: Blog Post

December 9, 2015

How shareholder short-termism damages innovation

Coins innovationA recent commentary in the Financial Times decried shareholder short-termism as a significant constraint on economic growth. Two studies, one Americanone British, demonstrate that, “public companies invest substantially less and are less responsive to changes in investment opportunities, especially in industries where share prices are most sensitive to earnings news.”

Among examples of how the relentless focus on short-term financial results is undermining long-term investment, the two studies note falling rates of investment in knowledge creation; one of the keys to innovation.

These findings are troubling because developed economies like Canada, the United States and Great Britain enjoy substantial comparative advantage in human capital via education and training, research and development and organizational efficiency. All of these are drivers of long-term growth both of individual companies and the economy as a whole.

The trouble is, for the most part, these investments are counted as costs on corporate financial statements and national income accounts. As a result, they are targets for cost cutting.

In Canada, lack of investment in knowledge creation and human capital is often cited as a cause of falling productivity. Productivity is one of those economic terms seen frequently in business news reports, but rarely defined.

It’s important because productivity is a key determinant of our standard of living over time. Briefly, productivity means using fewer inputs to produce more or better goods and services.

To do this requires improvements in operational processes, technology adoption and use, and/or the development of new and improved products and services with higher value. Taken together improvements like these are indicators of innovation performance.

The Conference Board of Canada monitors innovation with a regular report card.  Canada has not performed well in recent years. We earned a “C” on the 2015 report card and ranked ninth among 16 peer countries.

Even more alarming, a study by Statistics Canada found 37 per cent of Canadian firms, representing $740 billion of Canada’s Gross Domestic Product, described themselves as “non-innovative.”

When consulting firm Deloitte asked how prepared Canadian firms are for disruption in their industry they found that a mere 13 per cent of Canadian companies described themselves as “highly prepared.”

Echoing the Financial Times, Deloitte found while highly prepared firms remain committed to research and development investment nearly one in four “unprepared” firms plan to cut R&D spending over the next five years.

The evidence is mounting that an exclusive focus on short-term financial results is disadvantaging the long-term investments needed to increase productivity through innovation and that ultimately disadvantages us all.

Is shareholder short-termism damaging innovation?
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Tracey WhiteAbout the author

Tracey White is a negotiator, mediator and coach who specializes in strategic planning, execution, business operations, and analysis. She combines conceptual business acumen with a focus on metrics and data analysis to support evidence-based decision-making, planning and priority setting. Her strengths include Enterprise Project

Coin photo by Pat Pilon

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